Japan, EU look to trade pact as way to lift up economies

Japan and the European Union have taken an important step toward deepening their relationship by starting formal negotiations on a free trade agreement in April, seeking to boost their faltering economies by creating one of the world’s largest free-trade accords that will account for about 30 percent of global gross domestic product.

“With the change of the strategic environment, the Japan-EU partnership needs to be strengthened further,” Prime Minister Shinzo Abe said during a teleconference with European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso on March 25, launching the start of negotiations.

An FTA is important for both sides as it is expected to reinvigorate their slow-growing economies. The direct economic impact is considered to be big, especially for Japan, as tariffs are currently imposed on 70 percent of Japan’s exports to the EU compared to only 30 percent of EU exports to Japan.

Although some experts argue that there is not much of an economic impact for the EU side, the European Commission estimates that an FTA would boost EU exports to Japan by some 30 percent, which is equivalent to 1 percent of the 27-nation bloc’s GDP, and create around 400,000 jobs in its member nations.

An EU-Japan FTA is also an urgent issue for the EU, as various regional free trade negotiations are kicking off in East Asia and the Asia-Pacific region, including the U.S.-led Trans-Pacific Partnership to which Japan is expected to join negotiations in July, experts say.

“It’s becoming a competition of rule-making,” said Fukunari Kimura, a professor of economics at Keio University in Tokyo who is also a chief economist at the Economic Research Institute for ASEAN and East Asia.

“In addition to the TPP, negotiations on a trilateral trade accord between Japan, China and South Korea kicked off (in March), and the Regional Comprehensive Economic Partnership (comprised of 16 Asia-Pacific countries and centered around the Association of Southeast Asian Nations) is set to start talks (in May),” Kimura said, adding that if the EU fails to be involved in these ongoing movements, it will lag behind in the process of rule-making in the region.

The EU has been an important global partner for Japan, sharing basic values and principles, such as democracy, human rights and the rule of law.

The bloc, which makes up around 25 percent of the world’s GDP and has a population of about 500 million, is the third-largest trading partner in the world, and the largest investor in Japan with foreign direct investment of about ¥7 trillion in 2011, according to the Foreign Ministry.

The total value of imports and exports between the two was about ¥14 trillion in 2011.

As of 2010, about 3,750 Japanese firms had branches in the EU, creating around 470,000 jobs, or 0.2 percent of the EU’s employed population, the Foreign Ministry said.

At a meeting with Japanese business leaders on March 25, Duco Delgorge, chairman of the European Business Council in Japan, said that an EU-Japan free trade pact is “essential for continued prosperity and growth.”

Japan and the EU began considering bilateral trade liberalization talks around 2009. In July 2012, Japan and the bloc completed a so-called scoping exercise aimed at identifying concerns and interests related to a bilateral free trade agreement, and in November 2012, the EU adopted its negotiation mandate for an FTA.

The first round of negotiations was held in Brussels between April 15 and 19, and Japan and the EU agreed to proceed on talks in about 10 different areas, such as safety standards of products and intellectual property rights.

Both sides said that the negotiation kicked off smoothly and they have agreed to hold the second round of talks in Tokyo between June 24 and 28. They plan to hold negotiation meetings four or five times a year to finalize the accord as soon as possible.

The negotiations, however, will not be easy, experts say.

“I believe they will be tough negotiations. It will take at least three years (to finalize the pact),” said Takako Ueta, a professor of politics and international relations at International Christian University in Tokyo.

Ueta said that while Japan is calling for the removal of high tariffs for manufactured goods, such as the 10 percent on automobiles and 14 percent on electronics, European nations with big automaking industries will be expected to be negative on finalizing a free trade agreement with Japan.

Removing the high tariffs on automobiles is an urgent issue for Japan, as rival South Korea has already had an FTA in place with the EU since July 2011; subsequently, South Korean automakers have increased their market share in the bloc. Tariffs on South Korean automobile imports are being reduced in stages and are expected to be abolished in 2016.

Meanwhile, the EU is urging Japan to abolish non-tariff barriers in such areas as the safety of imported items such as food and pharmaceuticals, and car safety standards. It will also demand Japan to open up its public procurement market, such as in railroads.

EU Trade Commissioner Karel De Gucht said in late March that the negotiations would be suspended if a one-year review of the talks were to fall short of the expected progress.

The EU’s tough stance, however, may change when Japan makes its expected move to join the TPP negotiations, and as free trade talks with other East Asian nations get under way, experts say.

Kimura said that if the TPP or RCEP is finalized before the EU’s FTA with Japan, the EU will be placed out on a limb in rule-making in East Asia and the Asia-Pacific region.

“Everything is moving fast,” he said. “Its direct economic benefits may look small from the EU side, but what it needs to consider is how much cost the bloc would have to pay if it lags behind in rule-making.”

Meanwhile, Ueta said there are areas other than the economy where the EU and Japan can deepen their cooperation.

“As the EU is not a single nation, it is hard for (Japan) to negotiate,” Ueta said, “but if both sides proceed with things patiently, I believe there are things on which the two can cooperate.”

For example, Ueta pointed out a recent agreement between the two to cooperate on disaster preparedness. In March, land minister Akihiro Ota and European Commissioner for International Cooperation, Humanitarian Aid and Crisis Response Kristalina Georgieva exchanged letters of cooperation. This provides the basis for cooperation in preparedness and response to huge disasters like the Great East Japan Earthquake in 2011.

“Japan’s disaster prevention technologies are acclaimed in Europe. Even after the March 11 earthquake, most of the buildings were still standing, although they were destroyed later by the tsunami,” Ueta said, adding that Japan should make greater efforts to advertise such skills to the EU.